December 16th, 2010 9:56 AM by Preston Ware
Yesterday, I spoke with two long time customers whom I arranged a nice refinance for about three years ago. They had an ugly builder loan that I lowered and then they went out and secured a fixed mortgage second in order to do all of the necessary upgrades on their newly built home. Looking at their two loans into one, they have a first mortgage of $260,000 at 5.875% and a second 15 year fixed at 7.5%.
Option #1: We could consolidate the two loans into one with a 30 year fixed mortgage and save them $500 per month which would go over quite well. This savings would pay their closing costs in one year and life would be easier. This option is what was typically done in the past because those same borrowers could invest that $500 at a different return or just go out to dinner.
Option #2: They could consider a 20 or a 25 year fixed mortgage which would also lower their interest rate substantially and save them a lot of accumulated interest over time.
Option #3: What we decided on doing is something that many others should seriously be taking a look at. They chose to opt for a 15 year fixed mortgage which ultimately raised their total payment compared to what they have now but also allowed them to save $158,000 in accumulated interest over 15 years. $158,000 is what some people save in their lifetime and by pledging to put their nose to the grindstone and send an additional $158 more than they are paying now , this couple is pretty much is ensuring a mortgage free retirement.
Another way to look at this is to weight the tax benefits versus the amount of money that is put in your own pocket. Most people understand that interest on a mortgage loan is tax deductable. ( although our government is discussing ways of changing that) Think again about the percentage of your monthly mortgage payment that is applied to principal payment and the decision gets easier. (Especially at today’s low rates!)
A new thirty year fixed currently has a rate of about 4.875% and 13% is applied to principal.
A new twenty year fixed currently has a rate of about 4.75% and 20% is applied to principal.
A new fifteen year fixed has a rate of about 4.375% and 53% is applied to principal.
Yes you are coming in with a lot more out of pocket each month but it goes in to the same pocket at the end of the day.